Meg and the power of many

The world's biggest online auctioneer is trading on a new sort of future

MORE than 10,000 people from all over the world will gather in San José on June 23rd to praise, criticise and learn more about a remarkable business that has turned into a cultural phenomenon. Some will be collectors, others aspiring entrepreneurs and quite a few will have become millionaires. For many, the highlight of three days of networking and seminars will be a tour of the headquarters of the company that has made their own businesses possible: eBay. The online-auction firm's annual users' conference is being held in its home town this year to celebrate its tenth anniversary. In that supercharged decade eBay has gone from being a curious child of the internet to one of the fastest-growing companies ever. But adolescent problems are looming.

To remain one of the stars of the ever-evolving web, eBay has to change with it. The company has already achieved one extraordinary transformation: from being a website begun as a hobby and often used to trade collectables such as Beanie Babies, it has become an economy in its own right. It now has around 150m registered users worldwide—not far short of the combined populations of France, Spain and Britain—buying and selling goods expected to be worth well over $40 billion this year. Some 60m of eBay's users are “active”, having bid for or listed items within the past year.

In America, eBay's most established market, its rate of growth is slowing. Nevertheless, the company accounts for about one-quarter of all e-commerce sales, excluding groceries and travel. Some 500,000 Americans, eBay estimates, now make all or part of their living from trading on its site. eBay is also growing in popularity abroad. Around 12% of the time Germans spend online is browsing eBay's site there. Britons are not far behind in their use of eBay.co.uk. And new markets are opening in Asia. Against fierce local competition, eBay is pushing hard into China, which some expect will become the company's biggest market in five to ten years. Meg Whitman, eBay's chief executive, believes there is everything to play for: “I think we are still at the beginning of what eBay can actually become,” she says.

Others also spy the opportunities, not only of international expansion, but also in providing new services that bring buyers and sellers together. This is why the other three online giants, Google, Yahoo! and Amazon, are offering more buying and selling services. Yahoo! and Amazon also host auctions and Google's search facilities—including its comparison-shopping service, Froogle—allow consumers to search for links to whatever they are interested in buying. eBay's $620m purchase on June 1st of Shopping.com adds a shopping-comparison service to its offering.

As the entire internet becomes one huge marketplace with many ways to buy and sell, the challenge for eBay is to corral as much of that trade as possible. Its chief advantage has been the power of many. eBay delivers the efficiency of a global market to buyers and sellers, no matter how small they might be, in a neatly packaged way. As more buyers flock to its website, the more attractive it becomes to sellers, and so the bazaar grows. On top of this, eBay's reputation-management system and other features (see article), establishes a level of order and trust.

Thousands of different categories of items are now traded on eBay. Some of these things even eBay never expected to see. Used cars, for instance, surprised everyone, but are now its most valuable category (likely to be worth some $13 billion this year). Goods sold at fixed prices have come to account for 30% of the value of all goods sold. This, in turn, makes eBay more like an online retailer—but one that carries no stock. The wares of more than 260,000 virtual “stores” are also listed. Fixed prices have helped some categories, such as clothing and accessories, to grow rapidly—these are mostly sold as new items. This alone could be worth $3 billion this year. And new categories continue to appear all the time. One of the latest is for capital goods, ranging from used catering equipment to $100,000 MRI scanners.

The network effect of eBay might seem like a natural monopoly in the making. Indeed, many users howled in protest when in January eBay sharply increased some of its fees. But where else could they go? Ms Whitman scowls: the notion that users have no alternatives is, she says, “awfully arrogant”. There are other online auction sites, but they are much smaller. eBay's real competition, however, is increasingly coming from all over the internet, not least from people selling directly off their own websites and using online marketing methods, such as purchasing search terms on competing sites such as Google, to promote themselves. “Buyers today have many more options than they have ever had in the history of shopping,” adds Ms Whitman. To fulfil its ambition of becoming the world's trading platform of choice, the most important thing the company has to do is keep the vast army of eBayers happy.

Community relations

The eBay “community”, as it is called, can be a vociferous one—especially when it grumbles. “This was a noisy one,” says Bill Cobb about the protest over fee increases. As president of North America, he was charged with responding. The price changes were designed to balance the market, for instance to produce more differentiation between standard listings and optional features which sellers can pay extra for. But the reasons were not well explained, says Mr Cobb. There were other complaints too, so Mr Cobb did the rounds; attending what eBay calls “town hall” meetings with users and participating in debates on its message boards. Some eBay user groups are now plugged directly into eBay's corporate e-mail to alert category managers if things go awry. Executives know they will be buttonholed in San José, but expect it because they are dealing with issues at the centre of many of their users' lives. As Mr Cobb puts it, at eBay “the passion meter runs high.”

That seems to have been true ever since eBay (originally called Auction Web) was founded in 1995 by its chairman Pierre Omidyar, a software engineer. His aim was to create a simple online system in which a group of people could trade goods. As trading began to take off, professional management was brought in. Ms Whitman joined as CEO in 1998 from Hasbro, an American toy company, and later that year eBay became a public company.

eBay is on course to make an annual profit of around $1 billion this year. But any firm that has grown at such a frantic pace, consistently exceeding stockmarket expectations, is bound to take something of a pasting when its momentum slows. That happened when eBay's fourth-quarter results came in a fraction short of what Wall Street expected. Its share price fell sharply but has since partly recovered (see chart). Although results in the three months to March 31st saw eBay's quarterly revenues break through the $1-billion barrier for the first time, Google now rivals it in terms of market capitalisation.

Yet dealing with Wall Street pales in comparison with managing the company to the satisfaction of the eBay community. “Managing is the wrong word,” says Mr Cobb. “We enable, we listen, we respond.” The process is a world away from management at his previous employer, PepsiCo. “Generally in a company the employees know the most about the business. In eBay, our community knows more than we do,” he adds. Ms Whitman concurs: “We make a small number of rules and get the heck out of the way, because the entrepreneurial talents of our users will solve a lot of the problems.”

Such is the inherent beauty of the eBay business model. The users do most of the work: photographing their goods, writing their listings, communicating with their buyers, packing and then dispatching their sales. eBay earns a fee per transaction, enjoying an overall operating margin of 35%.

To keep the sellers and buyers coming back, eBay has to innovate with new features. The latest is a new format called “Want It Now”. This works in a similar way to a wanted ad. Another new service is “Best Offer”, which eBay describes as the addition of the “haggling” factor. It allows a seller asking a fixed price to entertain a best offer. Haggling is, as Mr Cobb says, “a time-honoured tradition of trading.”

Paying up

One of the most powerful services added by eBay was its $1.5-billion acquisition in 2002 of PayPal, an online-payments company. By the first quarter of 2005, PayPal's worldwide number of account holders was up 57% on the same period a year ago to 72m. This gives PayPal more account holders than American Express—and with hardly any marketing. In America, about three-quarters of the value of all the goods traded on eBay are now settled by PayPal.

The payments system was built on top of the financial markets, says Jeff Jordan, PayPal's president. Not only does it greatly speed up payments (they are confirmed instantly by e-mail), but it also addresses one of the main concerns of buying and selling online: fraud. To hold an account, PayPal validates the identity of its users through established bank accounts or credit cards. It then employs a number of powerful anti-fraud measures, the chief one being the simplest: no credit-card or banking details are revealed to either party. Fraud in the PayPal system is said to be about one-third less than that typically associated with most credit-card purchases.

PayPal is now following eBay overseas. As it has in Britain, the arrival of a localised PayPal service typically accelerates the use of the local eBay site. One of the reasons for this is that sellers can also accept credit-card payments through a PayPal account. The online-payments system is free to buyers, with sellers paying a fee. Qualifying sellers (those with good reputations) can even offer through PayPal a buyer-protection service worth up to $1,000. Last year PayPal also announced a tie-up with GE Consumer Finance to allow sellers to offer their customers credit as well.

Apart from its international expansion—which also makes cross-border purchases easier—a big push is being made to have PayPal adopted by other e-commerce sites. Some, especially individual proprietors, already use it. For bigger firms, PayPal is a payment option along with the usual credit and debit cards. The potential to capture an even bigger share of online commerce is, says Mr Jordan, enormous.

One of the great attractions of eBay is its entertainment value; like any great flea market you never know what you will find. As with other websites, eBay can trace where people go and what they click on—not that it always makes much sense. Someone may arrive at eBay following a link from an internet search for a Harry Potter novelty, but leave having bought an Apple computer. Serendipity is a powerful force that eBay is keen to play on, so that almost anything (provided it is not illegal or offensive in its various markets) can be found either by chance or design.

Along with other e-commerce firms, eBay is also interested in local shopping services. Last year it acquired a minority stake in craigslist, a San Francisco-based website operator and one of the pioneers of (mostly free) online local listings. In March, eBay launched Kijiji, which is Swahili for “village”. This is being used as an umbrella brand to offer classifieds in almost 100 cities outside America. In May, Kijiji bought London-based Gumtree.com and Spain's LoQUo.com, both of which also offer city-based classifieds.

Kijiji gives eBay more scope to carry things that do not naturally fit into its existing auction categories, like services, home rentals, personals and jobs, says Ms Whitman. But the project is, she cautions, at its earliest stages of development. So far, for example, there are no plans to export eBay's reputation-management system. But if eBay ever did, agrees Ms Whitman, it might one day be possible to find a plumber in London—and check the comments left on his level of service.

What will the next ten years bring? It seems likely that eBay will continue to become more like a giant portal for many more things—and that Yahoo!, Google and Amazon will evolve along similar lines. eBay executives agree that it is unrealistic to expect traders, however big or small, to use eBay exclusively, although some may. It will be up to eBay to win as much e-commerce as it can by its quality of service.

It will be a tough fight. eBay is not invincible. The company was trounced in Japan by Yahoo! and withdrew from that market in 2002. eBay blames much of its Japanese troubles on being late to enter the country. Building scale fast is a critical factor, says Mark Zaleski. He is chief executive of QXL, a London-based online auction site once seen as a rival to eBay, but now confined to market leadership in just Switzerland, Denmark and Norway. Even in markets where eBay is strong, says Mr Zaleski, it is still possible to compete through specialist auctions. But don't expect huge defections. “It's a bit like a club,” says Mr Zaleski. Some members may grumble and stomp off to a rival, but if most of the action remains at the place they have left, they will eventually wander back.

Networking in China

The battle to scale up quickly is now underway in China, where eBay is spending $100m to promote itself. If eBay is successful there, cross-border trading, which currently runs at about 15% of turnover, should grow. Ms Whitman expects such trade will be much bigger in years to come, as more and more connections are made.

But will she still be running eBay? When Ms Whitman, who is seen as the most powerful woman in corporate America, agreed to be shortlisted earlier this year for the top job at Walt Disney, some analysts thought she might be preparing to bail out of eBay. In the event, she withdrew and Bob Iger, already at Disney, was appointed its boss. Ms Whitman, who once worked for Disney, says she was flattered by the approach but “decided eBay was the best place for me.” She says she will remain at the helm for the next three years—to her tenth anniversary with the firm—and then decide if she is still the right person to run the company. But “where else do you go after eBay?” she asks. Ms Whitman describes her company as “still the best place in the world to start a new business.” Perhaps that is her answer.